When the apartment market was hot and heavy a couple of years ago, commercial mortgage-backed securities (CMBS) loans offered a great option for buyers.
Now, that world is falling apart. The numbers floating out there about CMBS problems are staggering. Deutsche Bank says 65 percent of commercial mortgages are maturing over the next few years, and $100 billion will not qualify for refinancing. Meanwhile, Fitch Ratings says $36.1 billion in CMBS has been transferred to Special Servicing.
But as multifamily owners deal with their own CMBS issues, there is uncertainty about what happens to CMBS loans and where to go when your loan is in trouble.
When a CMBS loan is made, the bank doesn’t just keep it on its books. “The loan is sold into a trust one time,” says Steve Russo, founder of The Commercial Real Estate Finance Group, a real estate advisory and investment group in Ft. Lauderdale, Fla. “That’s the last time the individual loan was dealt with. The trust is chopped up into different traunches. Those pieces then change hands multiple times. Once the loan is sold into the trust the first time, that’s the last time you deal with the individual loan.”
Different groups such as insurance companies and pension fund managers buy those pieces. Then a primary servicer, who is responsible for the direct borrower contact and collecting and remitting the payments, takes over. There’s also a master servicer (usually that’s also done by the same company that handles primary servicing), which is unique to CMBS, and it has a number of responsibilities, including overseeing the primary supervisor; collecting from the primary servicer and remitting to trustee; doing investor reporting across portfolios; advancing principal expenses; and handling approvals or requests from borrower or assignment of assumption or release of reserve.
The master servicer also administers the loan documents and has right to certain modifications specified in the loan documents, such as assignment/assumption, change in borrower entity, and release of reservists and escrow.
If a loan runs into trouble, it’s up to the master servicer to pass it to a special servicer. Usually, this happens after there’s a delinquency of 60 or more days, a default by the borrower, or an imminent judgment is on the way. Special servicers are allowed to make some modifications to the loan documents. [See our list of 10 of the top special servicers here.]
With so many loans on the way, a lot of special servicers are now staffing up. In fact, one who wouldn’t be identified for this story, has seen its portfolio (of which multifamily is the biggest component) increase tenfold over past 30 months. It has had to more than double its number of assets managers in the past two years.
If the loan starts performing again or a solution can be worked out, it can be transferred back to the borrower. “Up until the end, the owner may be able to cure the default or renegotiate,” says Pierce Ledbetter, CEO of Memphis-based LEDIC Management, a fee manager that handles operations for a number of distressed assets.
If the owner doesn’t, the special servicer begins the foreclosure process, which can take as much as a year. “Most of them [the special servicers] aren’t in the business of owning,” says John Bartling, co-founder and managing director of Dallas-based AllBridge Investments.
Depending on the jurisdiction a special servicers or a court can appoint a recover to take care of the asset in the meantime. The receiver finds a property manager, which it could also be affiliated with. “A special servicer, once they have foreclosed, will go into it just like any other property owner and hire a property manager,” Russo says.
And that can offer opportunity for apartment managers.